Wednesday, May 28, 2014

What do I do with my Gold ETF’s?


I believe that quite a few of my readers have investments in gold through the ETF route, as part of portfolio diversification.
Some of my readers have asked me this lately-  “what do I do with my Gold ETF’s – do I sell it? or do I keep it?.

There is no straight answer to this question as it depends on you and your ability to manage risks. But here is what I can share - my forecast of gold prices in the coming 12 months. You can take your call to sell or not to sell based on this forecast

Gold ETF's has given the following returns in the past 5 years:

  • Returns in 2009 – 22%
  • Returns in 2010 –21.5%
  • Returns in 2011 -30.5%
  • Returns in 2012 -11%
  • Returns in 2013 - (-14%)
  • Returns in 2014 - 3.5% till date (May end 2014)

Gold prices in India depend on two factors:

  • Global gold price  - if this goes up, the price of gold in India goes up and vice versa
  • USD/INR conversion ratio – if this goes up (means rupee is getting weaker) then the prices of gold in INR goes up and vice versa

For the next 12 months, the global price of gold is expected to be under pressure. It is easy to see the reason for this. The US economy is stable and the stock markets in US are doing really well. The EU economies are stabilising and the stock markets in EU too will be stable in the next 12 months. In such stable conditions, investors globally tend to exit gold and go towards stock markets (where there is better ROI). Hence the global prices of gold will be under pressure. This is visible in the chart below – the global prices of gold has been falling since 2012 mid (this correlates the US stock markets surge since 2012).

The USD / INR ratio is also expected to be in the range of 58-62 for the next 12 months. With the Modi govt in place, Indian economy should do better and the Rupee is expected to stay strong and that means that the rupee will be closer to 58 than 62.

Both these factors tell me that the gold prices in INR will not do well in the coming 12 months.

So here is my forecast - I believe that the ROI on gold will be below 10% in 2014. It will not be negative – but it will not be above 10%. So if you stay invested in gold, with a 10% inflation, you are technically losing money on gold investment.
So to sell or not to sell? - you take the call.